Isabella Mariam

The Delhi High Court Division Bench of Justice V. Kameswar Rao and Justice Vinod Kumar held that employees’ contributions towards Provident Fund (PF) and Employees’ State Insurance (ESI) are deductible under the Income Tax Act, 1961 only if deposited within the statutory deadlines prescribed under the respective welfare enactments. The Bench further clarified that where the due date falls on a national holiday, deposits made on the next working day shall be treated as compliant.

The proceedings arose from the assessment of Woodland (Aero Club) Private Limited, a company engaged in the manufacture and export of leather products under the Woodland brand. For the relevant assessment year, the assessee declared income exceeding ₹15 crores. During processing of its return under Section 143(1) of the Income Tax Act, the Centralised Processing Centre made adjustments disallowing a sum of ₹4,14,22,293, representing delayed deposits of employees’ PF, ESI, and Labour Welfare Fund contributions.

Also Read: Supreme Court Upholds Murder Conviction Under Section 302 IPC | Warns High Courts Against Delayed Uploading of Judgments

The Assessing Officer relied on Section 36(1)(va), which governs employees’ contributions deducted from salaries, requiring payment within the time prescribed under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ State Insurance Act, 1948. The assessee argued that since all contributions had been deposited before the due date for filing the income tax return under Section 139(1), they should be treated as allowable deductions.

The Commissioner of Income Tax (Appeals) accepted this contention and deleted the disallowance. However, on appeal by the Revenue, the Income Tax Appellate Tribunal reversed the decision, holding that the contributions were not deposited within the statutory deadlines and therefore could not be allowed as deductions. The Tribunal placed reliance on the Supreme Court’s judgment in Checkmate Services (P) Ltd. v. Commissioner of Income Tax, which had distinguished between employer’s contributions and employees’ contributions, emphasising that employees’ contributions are held in trust and must be deposited on or before the statutory due date.

Aggrieved, the assessee appealed to the Delhi High Court. Initially, the scope of the appeal was restricted owing to a concession recorded, limiting the challenge only to contributions due on a national holiday. That order was later reviewed by the Supreme Court, which restored the appeal and directed the High Court to consider the larger question of law regarding adjustments under Section 143(1)(a) and the applicability of the statutory provisions.

In its submissions, the assessee contended that the insertion of Explanation 5 to Section 43B by the Finance Act, 2021, which clarified that employees’ contributions are not covered by Section 43B, was prospective and not applicable to the assessment year under consideration. It was argued that before this amendment, judicial precedents, including CIT v. Alom Extrusions Ltd. and CIT v. Vinay Cement Ltd., had permitted deductions where contributions were deposited before the due date of filing the return. The assessee further maintained that adjustments under Section 143(1)(a) could not extend to issues involving interpretation of law, as they were not “apparent from the record.”

The Revenue opposed the appeal, arguing that Checkmate Services (P) Ltd. had conclusively determined the issue, holding that employees’ contributions are deemed income under Section 2(24)(x) and deductible only if paid within the due dates specified under the welfare statutes. It was submitted that Explanation 5 to Section 43B was clarificatory and reflected the legislative intent even for earlier years. The Revenue also defended the adjustments under Section 143(1)(a), asserting that the delay in deposit was evident from the tax audit report and thus constituted an incorrect claim apparent from the record.

The Court examined the scope of Section 36(1) (va) and Section 43B, along with the interpretation laid down in Checkmate Services (P) Ltd.. The Court recorded that “Employer’s contributions under Section 36(1)(iv) and employees’ contributions covered under Section 36(1)(va) read with Section 2(24)(x) are fundamentally different in nature and must be treated separately.” The Court stated that “Employees’ contribution deducted from their salaries are deemed to be income under Section 2(24)(x) and are held in trust by the employer. The employers can claim deduction only if they deposit these amounts on or before the statutory due date under Section 36(1)(va).” It was further observed that “The non-obstante clause in Section 43B cannot be applied to employees’ contributions governed by Section 36(1) (va).”

The Court noted that the Supreme Court had distinguished its earlier judgement in Alom Extrusions Ltd. and held that Explanation 5 to Section 43B was not considered in Checkmate Services, as the judgment had independently interpreted Sections 2(24)(x), 36(1)(va), and 43B. It observed, “This would further show that Explanation 5 is clarificatory in nature, elucidating the position of law/provisions of the Act, as existed. Therefore, the contention of Mr Ganesh that Explanation 5 shall be prospective and would not have any bearing on earlier assessment years, i.e., AY 2019-20 in this case, is clearly misconceived.”

The Court rejected the appellant’s contention that adjustments could not be made under Section 143(1). It stated, “At the time when the AO proposed the deductions, the judgment of the Gujarat High Court in Gujarat State Road Transport Corporation was in existence, which has been affirmed by the Supreme Court in Checkmate Services (P) Ltd. (supra). If that be so, it cannot be now said that the AO had erred in passing the order.”

Regarding the issue of contributions deposited on August 16, 2018, the Court referred to its earlier judgement in Pr. Commissioner of Income Tax v. Pepsico India Holdings Pvt. Ltd. It recorded, “Since the due date fell on a date which was a National Holiday, the deposit could have been made by the respondent/assessee only on the date which followed the National Holiday. Section 10 of the General Clauses Act would help the respondent/assessee to tide over the objections raised on behalf of the appellant/revenue.”

Also Read: Delhi High Court: Customs Must Be Sensitive In Proceedings Against Start-Ups And MSMEs | Govt Policy Promotes Start-Up Culture | Court Orders Release Of Goods On Duty Payment Under Customs Act

The Court recorded, “In view of the above discussion it is held the ITAT is justified in passing the order dated 09.01.2023. We find no infirmity in the same. The first question of law is decided against the appellant.”

“Since the due date fell on a date which was a National Holiday, the deposit could have been made by the respondent/assessee only on the date which followed the National Holiday. Therefore, the second question of law, as framed, is answered against the appellant/revenue and in favour of the respondent/assessee.”

The Court thus upheld the ITAT’s decision on the first issue but granted relief to the appellant regarding contributions deposited on August 16, 2018, recognizing the national holiday exception.

Advocates Representing the Parties:
For the Appellant: Mr. S. Ganesh, Senior Advocate with Mr. Anukalp Jain, Mr. Abhijit Mittal, Ms. Nishtha Nanda, and Ms. Shaivya Singh, Advocates
For the Respondent: Mr. Siddhartha Sinha, Senior Standing Counsel

Case Title: Woodland (Aero Club) Private Limited v. Assistant Commissioner of Income Tax, Circle 49(1), New Delhi
Neutral Citation: 2025: DHC:7788-DB
Case Number: ITA 267/2023
Bench: Justice V. Kameswar Rao, Justice Vinod Kumar